Tag: finance

House Democrats introduced a resolution on Friday to block President Trump’s Feb. 15 emergency declaration on the southern border, according to The Hill. Trump took the step to free up as much as $8 billion in funding for his long-promised southern border wall.

The measure is expected to pass the Democratic-held House, but will need to win GOP support to get through the Senate. –The Hill

Trump’s emergency declaration has had pushback from several GOP senators, meanwhile – who have warned that it could set a precedent for a future president to declare national emergencies to circumvent Congress down the road on issues such as gun control or climate change.

Given the GOP support, it’s possible that Democrats in the Senate would have the required number of votes needed to pass the measure – which President Trump would promptly veto, setting up a battle in which the House and Senate would each need an unlikely two-thirds majority to override.

“President Trump’s emergency declaration proclamation undermines the separation of powers and Congress’s power of the purse, a power exclusively reserved by the text of the Constitution to the first branch of government, the Legislative branch, a branch co-equal to the Executive,” said Pelosi in a Wednesday letter.

President Trump declared the national emergency last week after failing to secure the $5.7 billion he had originally requested amid tense negotiations which resulted in a partial government shutdown last month. The order faces multiple legal challenges, including a lawsuit from a coalition of 16 states spearheaded by California.

Then Bill Gates checked off another Sovereign Man theme: “the promises the government has made like taking care of healthcare and pensions, those will become more expensive, a higher percentage of GDP.”

A bill introduced by New Jersey Democrats would keep President Trump’s name off the state’s 2020 ballot unless he releases his tax returns, according to NorthJersey.com.

The new legislation, approved Thursday by the state Senate, was passed once before in 2017 only to be vetoed by then-Gov. Chris Christie. It would keep any candidate from appearing on the state ballot unless they make their tax returns public. Of note, New Jersey’s current governor, Phil Murphy, is a Democrat.

Similar legislation has been introduced in at least 28 states but has never been enacted, according to the National Conference of State Legislatures, meaning New Jersey would be the first to impose such a disclosure requirement if its measure is also approved by the Assembly and signed by Gov. Phil Murphy, a Democrat. –NorthJersey.com

New Jersey’s bill comes in response to President Trump’s longstanding refusal to release his tax returns – which he says he would gladly do if he weren’t under an ongoing IRS audit. The president’s decision not to disclose information about his personal finances has sparked a heated debate over whether such a bill is even constitutional.

“It is so obvious with this president that had voters known some of what seem to be his business interests, he may not have been elected president,” said state Sen. Loretta Weinberg (D), a sponsor of the bill.

The measure would likely be struck down in the courts, according to NorthJersey, and could also lead to more disclosures from candidates in the future.

“Today we require tax returns, but what would be next?” wrote former California Gov. Jerry Brown when he vetoed similar legislation in 2017. “Five years of health records? A certified birth certificate? High school report cards? And will these requirements vary depending on which political party is in power?”

““It’s just political pandering,” said attorney John Carbone, who specializes in election law at Carbone & Fasse.

“They can impose no requirements for a candidate for federal office, let alone president,” he said. “They’re thinking like Alabama Democrats during the Civil War: What can we do to get Lincoln?”

Although they are not required to do so by law, presidential candidates in the past have released their tax returns as a matter of transparency so voters could learn about their financial status, business dealings and potential conflicts of interest.

The Democrats who control New Jersey’s Legislature are eyeing a different mechanism to force the disclosure, threatening to keep off the New Jersey ballot any candidate who does not share his or her five most recent tax returns at least 50 days before the 2020 general election. –NorthJersey.com

Of course, no Republican presidential candidate has won New Jersey since 1988, so the impact to President Trump, should this law pass, would likely be minimal.

In March of 2017, MSNBC host Rachel Maddow embarrassed herself and her network when she published leaked partial copies of Trump’s 2005 tax returns – revealing that Trump paid a higher tax rate than Mitt Romney in 2011 and Bernie Sanders in 2014, along with Barack Obama at 18.7% in 2015 and Warren Buffet at 17.4%.

Recently, Wall Street and the Financial Media have brought much attention to the flattening and possible inversion of the U.S. Treasury yield curve. Given the fact that an inversion of the 2s/10s Treasury yield curve has predicted every recession over the last forty years, it is no wonder that the topic grows in stature as the difference between the 2-year Treasury yield and the 10-year Treasury yield approaches zero. Unfortunately, much of the discussion on the yield curve seems to over-emphasize whether or not the slope of the curve will invert. Waiting on this arbitrary event may cause investors to miss a very important recession signal.

The Incentive to Lend

A friend approaches you and asks for a loan. You are presented two options, lend her money for two years at 2% annually or for ten years at the same 2% annual rate.

Later that day, another friend approaches you for a loan. This time you have the option of lending money for two years at 2% or for ten years at 6% annually.

For the lender/investor in both cases, we will ignore inflation risk and assume the two borrowers are in similar financial circumstances. Given the options, you likely answered that if you were forced to lend in example one, it would be only for two years as lending for ten years produced no additional financial incentive to compensate for the additional eight years of risk. Keep in mind most of us would not lend for two years either due to the low-interest rate.

In example two, you may have been incentivized by the higher ten-year interest rate the borrower was willing to pay you. In example one, the “yield curve” is flat at 2%. In example two it is considerably steeper as 10-year “yields” are 4% higher than 2-year yields.

As portrayed, when investors are faced with a flat or inverted yield curve, their incentive to lend for longer terms is greatly diminished. The opposite holds when the yield curve is steeper as in the second example. Taking this one step further, when the absolute level of yields is very low, the incentive to lend, irrespective of the slope of the curve, is also greatly diminished.

When lenders have no financial incentive to extend credit, economies dependent on ever-increasing amounts of credit tend to struggle.

Yield Curve Predictive History

The graph below plainly shows that when 2-year Treasury yields exceed 10-year Treasury yields, otherwise known as “a curve inversion,” a recession has always followed. Following the inflection point of the inversion, as circled, the curve steepens through a recession and for some time afterward.

Data Courtesy St. Louis Federal Reserve

Given the curve is approaching the inversion point (black line), this compelling evidence is supposed to convince us that the odds of a recession are currently increasing but, and this is important, a recession is not a foregone conclusion yet. While a solid argument based on history, it rests on the theory that there will not be a recession unless 10-year yields drop below 2-year yields (black horizontal line in the graph).

There is another significant trend in the graph, which has gone largely unrecognized. The table below shows the lowest readings of the 2s/10s curve occurring before each of the last five recessions. It is the point of maximum curve inversion for each cycle.

As shown, the magnitude of the greatest yield curve inversion has steadily declined in each of the past five pre-recession episodes.

Increasing Debt Burden and Tight Lending Conditions

The graph below compares total domestic Debt and GDP.

Data Courtesy St. Louis Federal Reserve and Bloomberg

The graph highlights that debt is growing faster than GDP, with GDP representing our collective ability to service repay our debt. In this situation, it takes increasingly greater amounts of debt and lower interest rates to service the existing debt as well as generate new economic activity.

With this troubling dynamic in mind, think back to the two lending propositions we presented earlier. As the yield curve flattens and, by default, lenders are less likely to lend money and economic activity so dependent on that lending activity, slows.

If you accept that line of reasoning, then you must also agree that economies with larger debt burdens are more sensitive to a tightening of financial conditions. Taking it one step further, the amount of inversion required to generate a recession in such a scenario also declines. Might we now be at the point where inversion is not required, and a flat enough yield curve will hamper borrowing and stymie economic activity?

Summary

Based on history, one may deduce that if the curve were to steepen from this point, the odds of a recession decline. We strongly disagree. Given the incremental debt accumulation that has occurred as compared to the accumulation before those five prior episodes, financial conditions have more than likely already tightened enough to induce a recession. The recent steepening of the curve, which might be misinterpreted as a relief, is a flashing red signal that a recession is still very much possible.

For those of you that are stubborn and waiting on the curve to go to zero to sound the recession warnings, we share the graph below, courtesy of Crescat Capital LLC.

The graph looks at numerous yield curves and computes the percentage of them that were inverted at various points of time. Note that about 40% of curves are currently inverted. Have the collective curves already sounded the alarm, but everyone is too focused on a flat 2s/10s curve to hear it?

As we move into the final stretch of the second round of US-China trade talks markets are reaching fever-pitch. If they weren’t already nervous at the prospect of things going wrong the slew of weak data yesterday from the US and re: global manufacturing were a stark reminder that things are already less than rosy. US durable goods were 1.2% when 1.7% was expected; the US Markit Manufacturing PMI was 53.7 vs. 54.8; existing home sales were -1.2% not +0.2%; the Philly Fed was -4.1 not +14.0, with new orders tumbling the most since October 2008; in Europe, manufacturing is contracting with the Markit PMI at 49.2; and in Japan at 48.5. South Korea’s February 20-day exports were also –11.7% y/y and imports -17.3%. True, the services sector is still doing better than expected globally. But traditionally which sector leads and which one lags?

So understandably there is much head-scratching about just what is going on with the US and China. On one hand we have reports that SIX Memoranda of Misunderstandings are being drafted by the negotiators; and, yes, one of them is USD30bn of extra Chinese purchases of US soybeans, etc. Another is a commitment not to devalue the currency, which we shot down already this week as equally unworkable. And any commitment to structural reforms is not on the table.

Naturally, bulls have tried to seize on Trump tweets as a sign that détente looms: “I want 5G, and even 6G, technology in the United States as soon as possible. It is far more powerful, faster, and smarter than the current standard. American companies must step up their efforts, or get left behind. There is no reason that we should be lagging behind on…something that is so obviously the future. I want the United States to win through competition, not by blocking out currently more advanced technologies. We must always be the leader in everything we do, especially when it comes to the very exciting world of technology!”

6G?! Is that what the US will use in Spaaaaaaaace Foooooorce (which I will politely remind readers is still obligatory to pronounce through one’s cupped hands to get the required echo effect). With rumours of Trump meeting China’s trade chief today, does this all mean the US is not going to lock out Chinese telcos from its market and might even be about to hold hands with Huawei in a new grand deal, as some have interpreted it? And is the Huawei CFO about to be released from arrest in Canada soon, as a “Communist insider” also alleged yesterday?

Let me take a guess on the former at least: No.

As Trump was tweeting, Secretary of State Pompeo was showing the US is forcing a binary choice on its allies: use Huawei, lose the US. Pompeo stated: “If a country adopts [Huawei] and puts it in some of their critical information systems, we won’t be able to share information with them, we won’t be able to work alongside them.” For Canada, the UK, and Germany the choice is clear as the US is in NATO and China isn’t (or perhaps NATO isn’t wanted?) All Trump was doing in his tweet was kicking the US industrial complex up the backside to out-innovate Huawei; and not “blocking out currently more advanced technologies” means Huawei won’t be banned due to Chinese tech being better than the US, but for national security reasons. And Europe will eventually get off the fence on the US side for one other simple reason: it has two large firms well placed to push ahead with 5G themselves, if anyone can link national security and economics.

Meanwhile, China has been showing the world exactly what a reliable free-trading partner it is by banning Australian coal indefinitely, which knocked AUD almost as much as two RBA rate cuts in 2019 being predicted by a local guru (no, not me: I got there first but don’t move markets Down Under). However, it’s the usual game of accentuate the positive from the Antipodean Wonder Boys today as Australia is dragged over suddenly not-so-hot coals. Treasurer Frydenberg cautioned against “jumping to conclusions” that the ban had anything to do with Huawei (or stripping residency from a certain influential pro-Beijing individual?) and reassured that Australian exports to China “will continue to be strong”. The RBA Governor’s semi-annual testimony saw him argue China’s coal ban might be for environmental reasons(!) but admit there would be “very difficult” economic consequences if the coal ban is a sign of a “souring” Australia-China relationship. Yes, there certainly would; and as things are playing out, yes there certainly will. However, the furthest Lowe would go is to say it was “unlikely” that rates would rise this year.

In China itself, the PBOC is also arguing that it doesn’t need to cut rates. That’s partly because when local coal producers start to suffer, for example, you can just shut down Aussie competition even if you have a Free Trade Agreement signed between the two states. (What price those six new US-China MoUs?) But specifically, who cares? The PBOC needs to keep short-term rates at a reasonable level to prevent currency collapse but are still talking about “targeted” stimulus; and they just forced 5% of GDP into the economy in one month; and borrowing costs have been declining for firms anyway. If the same trends hold up in the next few months it’s clear what is actually happening. Are foreign commentators still under the illusion China has a market-based financial system based on the cost of credit (i.e., rates) rather than the quantity (i.e., quotas/volume)?

Having said that, I can think of another central bank riddled with monetary-policy acronyms for quotas that keep its financial system afloat. Let’s just say it’s watching Brexit closely, where a 3-month Article 50 extension now appears to be more on the cards than before. Markets will love that. Yet will it solve anything? Not unless the brave new Independent Group swells from 11 to well into the triple figures by then: and if you believe that then I have a Chinese-built bridge to sell you.

As bureaucrats in Brussels wait for the other shoe to drop following the completion of the Commerce Department’s report on whether auto imports represented a “national security threat” (spoiler: they do), they are once again making it clear to the White House that, if it follows through with 25% tariffs on imported cars and car parts, the EU will swiftly retaliate with tariffs of its own.

And according to Bloomberg, the EU’s trade officials are targeting Xerox, Caterpillar and Samsonite for retaliation should the US move ahead with auto tariffs.

Unsurprisingly, shares of Caterpillar and Xerox tumbled on the news:

Samsonite’s ADRs weren’t trading. Trump struck an agreement with the EU’s Jean Claude Juncker last year to avert a trade war, but it appears negotiations on a final deal have stalled.

Kraft Heinz has crashed 25% ahead of today’s open after writing down the value of some of its best-known brands in an acknowledgment that changing consumer tastes have destroyed the value of some of the company’s most iconic products.

This is not your typical “reset the base and everything will be fine” story;the earnings report was “disastrous”

Analysts at JPMorgan, Stifel, Piper Jaffray, Barclays and UBS cut their ratings on the stock following what Stifel described as a “barrage of bad news: Quarterly profit missed estimates, the outlook for 2019 was disappointing, and Kraft Heinz cut its dividend, lowered profit-margin expectations and took a $15.4 billion writedown on key brands.”

Bear in mind that before this “disaster” 13 analysts had buy reccs, 7 holds, and only 4 sells…

But apart from that, everything is awesome right? Well no…

The company also admitted it had received a subpoena in October “associated with an investigation into” its accounting policies, procedures and internal controls related to its “procurement function.”

This includes “agreements, side agreements, and changes or modifications to its agreements with its vendors,” said Kraft.

“Following this initial SEC document request, the Company together with external counsel launched an investigation into the procurement area,” said Kraft. As a result of the probe’s finding, the company had $25 million more in costs of products sold during the fourth quarter, said the company, “as an out of period correction.”

Kraft is now implementing “certain improvements” to its internal controls and has take other “rel measures,” it said.

“We continue to cooperate fully with the SEC and at this time the Company does not expect matters subject to the investigation to be material. For context, this $25 million increase to costs of products sold compares an annual procurement spend of over $11 billion annually for the total company,” Kraft Heinz spokesman Michael Mullen told TheStreet in an email.

The result was a 20% drop oven right which has extended this morning to a 25% collapse to a record low for the stock…

“Persistently weak organic sales growth generated by Kraft Heinz’s stable of branded cheeses, meats and coffee products has begun to weigh on its industry-leading operating margins. Management’s plan to shore up sagging cash flow and reduce debt leverage through reduced dividend payout and asset sales is a sign of the urgency to restore growth.”

And finally, Warren Buffett is feeling the pain this morning as Berkshire Hathaway’s investment in Kraft declined from a valuation of about $15.7 billion to $11.7 billion as the stock plunged below $36 at this morning. Thursday’s announcement marks the second time this year that a Berkshire holding has disclosed unfavorable news after the markets closed, hurting its stock. Apple trimmed its revenue outlook in January, which pummeled shareholders. That stock has since recovered.

John C. Fry, an analyst in the San Francisco IRS office who had worked for the agency since 2008, was charged with disclosing Cohen’s Suspicious Activity Reports (SARs) – nine months after we reported that it wouldn’t be difficult to track down the leaker due to a digital trail left behind from accessing the system.

Fry appeared in court Thursday where he did not enter a plea. He was released on $50,000 bond, and has a hearing scheduled for March 13. He faces up to five years in prison if convicted. According to CNN, “In recent weeks, Fry’s hearing date was pushed back several times as federal prosecutors were engaged with Fry’s attorney on plea negotiations, according to a person familiar with the talks. As of Thursday, Fry declined to plead to felony charges in exchange for probation.”

Banks are required to file suspicious activity reports (SARs) for dubious financial transactions. Fry told The New Yorker‘s Ronan Farrow in May of 2018 that some of Cohen’s SARs were missing.

Bloomberg suggested in May of last year that the leaker was a low level IRS employee because they were apparently unaware of several legitimate reasons why these reports wouldn’t appear in the database. For example, they could’ve been restricted because they had become part of an investigation.

“Under longstanding procedures, FinCEN will limit access to certain SARs when requested by law enforcement authorities in connection with an ongoing investigation,” Hudak said. –Bloomberg

This was in fact the case, according to the criminal complaint, which notes that two SARs “were not available for viewing by registered users in the FinCEN system” because “they were related to a sensitive open investigation.”

After Fry accessed the reports on May 4, 2018, he reportedly called Avenatti twice, after which Avenatti “used his public Twitter account to circulate a dossier releasing confidential banking information related to Cohen and his company, Essential Consultants,” according to the complaint. Fry also shared information with reporters from the Washington Post and TheNew Yorker.

Based on the information Fry provided, Avenatti released a seven-page dossier containing various claims of financial malfeasance by Cohen. Embarrassingly, however, Avenatti included SARs from two incorrect Michael Cohens thanks to Fry’s information.

two of the allegedly “fraudulent” payments were made to men named Michael Cohen who have no affiliation with Trump.

Avenatti’s report includes a section listing “possible fraudulent and illegal financial transactions” involving Trump’s lawyer. One of the payments is a $4,250 wire transfer from a Malaysian company, Actuarial Partners, to a bank in Toronto.

The other is a $980 transfer from a Kenyan bank to Bank Hapoalim — the largest bank in Israel. –Daily Caller

In an email sent by one of the misidentified Michael Cohens to the Daily Caller, Avenetti is excoriated for not doing more research before releasing information.

“You are surely aware of the fact that this is an extremely common name and would request that you take care before involving innocent parries [sic] in this sordid affair,” wrote Cohen, who told Avenatti he is an international consultant who was paid by Actuarial Partners for work on a project in Tanzania.

Cohen was sentenced to three years in prison for a series of crimes, including tax evasion, financial fraud and campaign finance violations stemming from a scheme to pay off women who claimed to have had decade-old affairs with Donald Trump. He is scheduled to report to prison in May.

As restrictive regulations (MiFid II forced the separation of banks’ trading and research businesses) and intensifying competition from American rivals continues to hamstring once-proud European investment banks, SocGen is reportedly the latest continental titan preparing to dramatically reduce the size of its Global Banking and Investor Solutions unit – cuts that could include thousands of jobs – while the bank searches for a partner for its cash equity business (a strategy that has been embraced by other European banks as MiFid has changed the rules surrounding research and other typical i-banking functions).

One of the bank’s unions said the bank’s traders are bracing for some of these cuts, though the bank is still reportedly weighing which businesses will bear the brunt of the cuts. Shareholders who have punished the company over the past year – the bank’s shares have largely missed out on the STOXX 600’s 2019 rebound – bid its shares higher on Friday, with SocGen shares rallying more than 2% on the news.

The bank could cut hundreds or even thousands of jobs at its global banking and investor solutions unit, including roles in support functions such as finance and human resources, one person familiar with the situation said, ask not to be identified because the matter is confidential. SocGen is still weighing up which parts of the business would bear the reductions, the person added.

Societe Generale declined to comment.

SocGen’s GBIS unit has more than 20,000 employees. One of SocGen’s main French labor unions said Feb. 8 that the bank is bracing for “important” cuts to trading jobs. Chief Executive Officer Frederic Oudea has said it’s too soon to comment on any headcount decisions.

The cuts would be part of CEO Frederic Oudea’s drive to cut 500 million euros ($567 million) of costs and place all less-profitable investment-banking business lines under review. Oudea promised the cuts after the bank reported brutal Q4 earnings (it has already slashed trader bonuses and said it would eliminate the last vestiges of its prop trading unit).

Cuts would also be part of the efforts by the i-bank’s new leader, Deputy CEO Severin Cabannes, to readjust a business plan developed by his predecessor.

While news of the bank’s plans was well-received by investors, we can’t help but wonder how Jeffrey Gundlach, who lashed Oudea on twitter earlier this month when SocGen’s shares touched a five-year low.

Fresh 5 year low share price for tanking SocGen as Oudea continues to have no idea what he is doing except running the bank into the ground.

As anybody who has been paying attention to the market over the past 2 months is aware, the multi-month rally in stocks has in large part – in addition to the now quite explicit central bank support – been driven by jawboning from President Trump and senior administration officials, who haven’t missed an opportunity to pump assets with optimistic, if vague, pronouncements about the state of the talks.

Though there’s plenty of evidence to suggest that deep divisions remain and that the Chinese are nowhere near relenting on the US’s key demands when it comes to currency manipulation and stealing technology transfer , when Trump tells it, the talks are either going “very, very well,” or “moving in a positive direction” or on the verge of some unspecified breakthrough.

But this doesn’t mean that the storm clouds aren’t gathering. US stocks closed in the red on Thursday as trade anxieties briefly resurfaced, and as investors briefly appeared to acknowledge the fact that – as the Wall Street Journal explicitly reported in a story published last night – “deep gaps” persist between the US and Chinese officials as they struggle to hammer out their six memorandums of understanding.

And in what could be a make-or-break moment, President Trump is expected to meet (once again) with Chinese Vice Premier Liu He on Friday at 2:30 pm ET, just in time to pump stocks higher with a press conference 15-30 minutes ahead of the close. The meeting has taken on increased significance since Liu, the Chinese official who has been tasked with leading the negotiations, has been imbued with “special envoy” status by President Xi, empowering him to negotiate on behalf of the Chinese leader.

There are three ways in which China can import $30 billion more in U.S. agricultural goods per year in an attempt to appease President Trump’s concerns about deficits.

These three should give you a sense of how off the mark this number is.

Either China wants to ram food down the throats of its citizens, has plans to build more silos to store grain (which is already rotting in Chinese silos), or will just stop buying soy and beef and chicken from Brazil, much to Brazil’s dismay.

And though China has offered other concessions like opening up its market to foreign insurers, something that would progress only gradually, negotiators have resisted the US’s demands for “structural reforms” to its economy and denied accusations that it forces foreign competitors to hand over their IP. Meanwhile, the US’s demands that Beijing keep its currency “stable” – something that Chinese policy makers are already struggling to achieve – has been met with a wary response from Beijing (and would be counterproductive to the US in the long run).

As the fourth round of negotiations since the start of the year comes to a close on Friday, and with the March 1 deadline looming in the very near future, analysts are growing confident that the US will put off raising tariffs on $200 billion in Chinese goods.

“Given that enough headway seems to have been made to warrant a meeting between Trump and the Chinese negotiator today, it appears more likely that the U.S. will not raise the levies, which should help high-beta currencies and equities push higher,” said Konstantinos Anthis, head of research at ADSS.

Analysts at UBS joked that traders expect the March 1 deadline to be “magically moved” (after Trump said the deadline wasn’t “a magical date”).

US President Trump is to meet Chinese Vice Premier Lee Hu today, to discuss the magic date of 1 March (when President Trump increases taxes on Americans who buy goods partially made in China). Investors increasingly expect that date to be magically moved, or even to disappear.

But anybody hoping for news of a breakthrough in negotiations might be disappointed.